RBL Bank Shares Slip Most In 21 Months Despite RBI’s Clarity Over Financial Health

Shares of RBL Bank Ltd. closed with the steepest loss in more than 21 months as analysts turned cautious after the Reserve Bank of India appointed an additional director on the lender’s board, and its chief went on “medical leave”.

While RBL Bank didn’t offer any clarity behind the banking regulator’s move, it assured investors of its asset quality position and earnings guidance. Still, some analysts aren’t convinced as they see the RBI’s decision as indicative of “grave situations” and that it raises concerns regarding the stability or continuity of the lender’s management.

That caused the RBL Bank stock to slump as much as 25%—the biggest intraday decline ever—to a 52-week low of Rs 130.2 apiece as of 10:30 a.m. on Monday.

The RBI on Dec. 25 appointed chief general manager Yogesh Dayal, currently in-charge of communications at the central bank, as an additional director on RBL Bank’s board for two years or until further orders. Simultaneously, RBL Bank said its Managing Director and Chief Executive Officer Vishwavir Ahuja will proceed on leave with immediate effect, while Executive Director Rajeev Ahuja will take over as interim MD and CEO.

Vishwavir Ahuja had received board approval for reappointment as MD and CEO for another three years, but the RBI cleared only a one-year extension. His term was set to end in June 2022.

According to Rajeev Ahuja, the regulator has full faith in the bank’s management and its financial position. The December-quarter performance is expected to be better than the preceding three months, he told reporters on a conference call on Sunday. He reiterated that the lender was not aware of any governance-related investigations against any of its members.

The stock pared some of the losses after the RBI issued a statement urging depositors and other stakeholders to not react to speculative reports. The bank, the RBI said, is “well capitalised and its financial position remained satisfactory”.

According to the banking regulator, the appointment of additional director was a step undertaken as and when the RBI felt the lender’s board needed support in regulatory and supervisory matters. RBL Bank’s financial health is ‘stable’.

The bank’s stock closed 18.48% down, the worst since March 13, 2020. Of the 25 analysts tracking RBL Bank, 11 maintained a ‘buy’, eight recommend a ‘hold’ and six suggest a ‘sell’, according to Bloomberg data. The overall 12-month consensus price target implies an upside of 45.6%. The consensus analyst recommendation was lowered from ‘buy’ to ‘hold’ on Monday.

The Relative Strength Index was 24, suggesting the stock may be oversold. Its trading volume was 27.4 times the 30-day average volume, at the time of market close, according to Bloomberg data.

Here's what analysts have to say about RBL Bank...

CLSA

• Maintains 'outperform' but cuts target price to Rs 200 from Rs 230, an implied return of 15.61%.

• Similar actions from the RBI in the past have usually come when the banks were in trouble.

• The RBI's intervention is likely to create uncertainty in the near term and the reasons for the move are not well known.

• The next six months will be key in validating management's confidence of its expected performance.

• H2FY22 results will be crucial in ascertaining the significance of the RBI's action.

Emkay

• Maintains 'hold', cuts target price to Rs 165 apiece from Rs 215, an implied downside of 4.62%.

• Management did not provide satisfactory reasons for the RBI's appointment of its official as an additional director on the bank's board.

• The regulator's long-term discomfort with unsecured heavy asset-side construct (MFI + cards at 31%) creating asset quality risks; poor compliance with directives on risk management/governance/succession could have led to the intervention.

• Management says the change was not due to asset quality issues/divergence as recovery trends are largely in line.

• The nomination and remuneration committee will recommend a candidate to replace Vishwavir Ahuja.

• More explanation is needed from the bank's management to comfort investors.

• The story of the sudden exit of Vishwavir Ahuja and the RBI intervention will unfold in due course.

• Near/medium-term business or asset quality dislocation looks inevitable.

• Cuts earnings estimates for FY22, FY23 and FY24 by 176%, 13% and 12%, respectively.

• Cuts target price, given lower RoE and near-term management uncertainty.

Dolat Analysis

• Places the stock 'under review' from 'accumulate'.

• Regulatory action similar to the one taken in RBL Bank is generally indicative of 'grave' situations and raises concerns over reasons behind the move.

• Any large outflow of wholesale deposits remains a monitorable.

• Possible third Covid wave could again have an impact on bank's vulnerable portfolios.

• Short-term shocks from deposit outflow should be manageable as liquidity is in much stronger position than in March 2020.

• The unanimous vote favouring the reappointment of Vishwavir Ahuja for another three-year term in September 2021 seems to have not gone down well with the regulator, as the RBI cleared Vishwavir Ahuja's term extension by only one year, starting June 2021.

• Exact reasons for the RBI action still remains unclear and there is lack of clarity on Ahuja's future with the organisation.

• Bank's management clarified that the developments do not alter the financial position or the strategy as growth picks up across segments.

Nirmal Bang

• Downgrades stock to 'accumulate' from 'buy', cuts target price to Rs 191 from Rs 236, still an implied return of 10%.

• The RBI's sudden action has raised concerns among investors regarding stability/continuity of the bank's management.

• The RBI's appointment of a director and significant asset quality issues have gone hand-in-hand, in general, in the past.

• Questions regarding reasons for Vishwavir Ahuja's immediate leave and the appointment of the RBI directors have not been addressed satisfactorily so far.

• The RBI's appointment of its director could be to ensure smooth management transition or a precautionary step in anticipation of systemic risks.

• Investors would do well to assume near-term impact on deposits.

• The RBI's appointment of its director will rattle some nerves despite the management sounding positive on the asset quality front.

Jefferies

• The RBI has used such powers a few times in the past due to concerns over either asset quality/capital or management succession.

• Uncertainty caused by the announcement could have a "knock-on impact" on other small private banks.

• RBL Bank has provided 'limited clarity on reasons' for the RBI's moves; the central bank's inspection for FY21 is yet to conclude.

Morgan Stanley

• Maintains 'underweight', cuts price target to Rs 170 from Rs 190, an implied downside of 1.73%.

• The news is negative for RBL Bank and could imply near-term pressure on profitability.

• Management maintains near-to-medium term earnings guidance.

• Bank has not provided any pointed reasons for the CEO exit or the intervention by the RBI.

• Recent changes increase uncertainty over the near term.

• Sees downside risk to earnings and expects the bank to optimise its unsecured loan mix, which could weigh on earnings improvement.

• There could be near-term volatility in deposit flows due to recent developments.

Motilal Oswal

• Places stock 'under review' from 'buy'.

• Recent developments come as a negative surprise and raises concerns on the bank's performance as perceived by the central bank and its ability to deliver on its guidance.

• Lender has witnessed elevated asset quality stress in the last few years.

• Slippages have risen in the unsecured business (MFI and credit cards) after the lift of Covid-related restrictions.

• Projects RBL Bank to report losses in FY22.

• Remains watchful of further developments and awaits further clarity in the Q3FY22 result.

Investec

• Places stock 'under review' from 'buy'.

• Process for permanent transition underway, while the appointment of internal interim CEO is reassuring.

• Event is clearly a negative outcome from investor confidence perspective as similar previous instances have ended up adversely impacting minority shareholders.

• The bank is well positioned with respect to both capitalisation CET ratio and liquidity position, in comparison to other lenders who faced similar intervention by the RBI.